Helping Clients Provide for Their Child and Protect Their Retirement with Special Needs Planning – Trusts, Benefits and ABLE
By Derek Graham, Partner, Resch, Root, Philipps & Graham, LLC
My business partner and I teach a class at Ohio State. In this class, we talk about a triangle of services in financial planning. The bottom of the triangle is what everyone expects from their financial planner, and the top of the triangle is less-encountered issues. When financial planners can spot issues and recognize important topics at the top of the triangle, they really stand out. Those are the financial planners they will tell their neighbors about, which they will bring up in a dinner conversation. In this article, we will cover the top-of-the-triangle issues you will not encounter on a day-to-day basis.
This article will identify some of the various government benefits available to persons with developmental disabilities. There are a lot, and one of the challenges is that government benefits vary from state to state, but overarching themes are valid in every state.
We’ll cover how a child with a developmental disability may be impacted when a parent elects to draw Social Security benefits. There is much information about when to draw Social Security, how much you will draw, and the cost/benefit analysis of drawing at certain ages. One of those top-of-the-triangle issues is when financial planners recognize what it does for your entire family, including your adult child with a developmental disability. This will separate them from other planners and it will impact my daughter with Down syndrome when I retire someday.
We will also identify strategies used to protect eligibility for these benefits. Parents of children with developmental disabilities are going to become advocates. The system requires this of them, and their families require this of them. Understanding how to get those benefits is important. Still, it is just as important to understand how to protect eligibility, making sure that the parents or the parents’ death or something of that nature does not then mess up those very things that parents spent their lifetime advocating to obtain for their loved one.
What benefits are available for persons with developmental disabilities?
I had been an attorney for five years when my wife and I had our first child. When my daughter was born, she had some medical issues. She was in the hospital for quite a while and has been back many times since. I will never forget, on day three or four of her life, being handed all these packets by hospital social workers who gave me information about things like Medicaid, SSI, and other government benefits.
I thought, “Surely, I don’t qualify for any of this stuff, and why do I care about this? We have health insurance.” I remember throwing the packets of information away. I also remember being confused about why they gave them to me and whether I did something wrong by throwing them away in a huff.
Parents and families who have loved ones with developmental disabilities have a lot to learn. The more you can help them, the more it will make you a top-of-the-triangle planner remembered and talked about amongst social circles. More importantly, you will be doing a great service for your client.
Your clients and families who have a loved one, a sibling, a child, or a person in their life with a developmental disability, live in what I call the “one percent.” Many things about my daughter’s life that have happened to her from a medical or social standpoint will happen to less than one percent of the people alive. Your clients and families will naturally do things differently, such as gravitating to and becoming friends with other individuals or families with loved ones with developmental disabilities. But when it happens over and over, it compounds, and you start to feel like you live in the one percent.
The uncertainties for parents of developmentally disabled children
My wife and I have a joke in our house of, “That’s life in the one percent.” It’s true. You wake up one day, and you learn something new from a medical standpoint or even a social standpoint that you never saw coming, and it changes your entire day. This makes parents and families with loved ones with developmental disabilities significantly more risk averse. With my other two daughters, if you ask if they can engage in an activity and there is a 99 percent chance that they will be fine, my first thought is, “Sure, go do it. Have fun.” With Megan, my daughter with Down syndrome, even if there is a 99 percent chance that she will be fine, in my mind, you have just identified exactly what will go wrong. Keep this in mind when dealing with families and clients with loved ones with developmental disabilities.
There are very few things that will confuse and bewilder a young family who has a child with a developmental disability more than trying to picture what adulthood will be like. When any child is a baby, you do not know what they will grow up to be. You do not know what profession they will do, but you picture the opportunities available to them. You have a picture of how you think life will go for them, and a lot of that is shaped by how your life has gone. When I meet with families with a loved one with a developmental disability, one of the common themes that run throughout all these families (which will certainly be true for your client) is that they do not know what adulthood will be like. Because I have a daughter with Down syndrome, I have sometimes wondered if that means she will live with me for her entire life.
Does this mean that her adulthood is going to be significantly more expensive?
Do I have to save substantially more money and stop going on vacations because I have a child with a developmental disability that I need to pay for her entire life, and then leave more money for her to pay for all these expenses when I am gone? She will not have the same earning potential as my other children. All these things flash through your head. When dealing with clients who have loved ones with developmental disabilities, understand that imagining adulthood for their child will be a mystery to them. It is hard to picture what life will be like for them when their son or daughter is 25 or 30 because they don’t know their capabilities.
It is also true because you do not know what resources will be available to them. There is benefit confusion. Families with loved ones with developmental disabilities are, in most states, going to be provided services through a county Board of Developmental Disabilities or some government agency that is there to provide social work and care coordination and to help them through life.
They will almost always be offered opportunities to learn about different benefits. However, it is tough when you have a sixth, seventh, or eighth-grade kid and that child has a developmental disability. You know that you need a special needs estate plan, and you have heard about that before. You have heard about Social Security, and you know that people might get Social Security, and you probably know other families who are getting Social Security. You might know another family who is not getting Social Security. You have heard people talk about Medicaid. I have health insurance through my employment, so what is the big deal about Medicaid? Do I really need to be concerned with this?
A Rubik’s cube is analogous to what it is like to be a parent of a child with a developmental disability. You know there is a red, blue, and white side, but you do not know how to piece it all together. You know that at some point in your child’s life, they will need Social Security benefits, or they may be entitled to Social Security benefits. You know that they will probably need Medicaid, but you do not know why or when. Whoever named the various benefit programs certainly compounded the problem. We have SSI and SSD, two very different programs. We have Medicaid, and we have Medicare, two very different programs. This confuses families.
Then there is the need for advocacy. Parents who have loved ones with developmental disabilities and siblings of those with developmental disabilities will become advocates. They might not naturally be predisposed to be an advocate, but they will have to. Families learn this as they go through life with a loved one with a developmental disability. Like it or not, it is a role they will have to take on; they must step up and advocate in that individual’s life. Part of being an advocate is trying to help find information. Often, parents are just looking for someone who can provide a clear answer. They don’t need someone to come in and change the world; they need someone to answer the basic questions in a way that they understand.
After the dust settled and we passed some major surgeries and things of that nature, I knew I needed a special needs estate plan. But I did not know what a special needs estate plan was, and frankly, I could not have told you why I needed a special needs estate plan. So, I asked different attorneys that I knew who did estate planning. I quickly found that you can ask the attorneys who “specialize” in special needs estate planning, and you will get different answers as to what exactly it means and how it works. There is a lot of incorrect information out there. So there is a need for advocacy, and often being an advocate is just getting the correct information. This is where you, as an advisor, come in because you can provide clear, concise answers or direction as to where to get the answers that will make all the difference in the world to your clients.
A Developmental Disabilities Benefits Matrix
When I meet with families, I start with the benefits matrix. This graphic, I find, goes a long way toward solving some of the confusion.
Families hear about these terms but do not understand what they mean and when they become applicable. I will refer to this benefits matrix a few more times.
Medicaid for people with developmental disabilities
We’ll start by talking about Medicaid. Medicaid is a federal program, and many people think Medicaid is for someone who does not have private health insurance. Medicaid has been made more confusing in recent years by “expansion Medicaid,” a much broader version of Medicaid. You need to know that your state, wherever you are, has a state Medicaid plan. Within that plan, a particular type of Medicaid is designated for people aged, blind, and disabled.
The Medicaid coverage available for persons with developmental disabilities is often different. It is certainly very different here in Ohio, and it is different in most of your states as well. Compare that with SSI, which is Supplemental Security Income. This is another program we will address, and this support is for aged, blind, and disabled persons. It is not a Social Security trust or retirement benefit, but a program administered by the Social Security Administration. The SS stands for Supplemental Security and is a line item on the federal budget. These two programs will be most families’ first step into means-tested programs. Through one of these programs, families generally first learn of means-tested programs and their availability.
The federal government started Medicaid in 1965. While working on the legislation, many states asked for help covering the cost of institutionalization. This word makes the skin crawl of a parent of a loved one with a developmental disability. Institutionalization was the reality in 1965 because, at the time, Medicaid paid for two things: the health care of persons with developmental disabilities and placement in a 24/7 facility, or an institution.
The federal government started allocating this federal money to the states to help pay for the cost of some of these institutions. They did what the federal government often does; they sent regulators in to see how the money was being spent. Fast forward decades, and fortunately, the institutions closed. What this left was a federal program that could be used to pay for the health care and the health component of the aged, blind, and disabled. It could also be used to pay for institutionalization. So, even though we did not have those brick-and-mortar institutions that, in large part had closed, we still had facilities that were 24/7 facilities. In Ohio, we called them intermediate or long-term care facilities for a person with a developmental disability. But the only way to tap into Medicaid at the federal level was to qualify by placement in that 24/7 facility.
By 1981 the government realized that it was expensive to pay for the 24/7 care of a person in a facility. Wouldn’t it be cheaper for the government if, instead of paying for 24/7 care in a facility, families were given a fraction of the cost of the 24/7 facility to pay for some extra support and keep their loved ones living independently in the community? This was the birth of Medicaid waivers; they waived the requirement that their loved one lives in a 24/7 facility.
Medicaid waivers created a funding stream that could be used to pay for things like homemaker personal care, home modifications, transportation, or job coaching. It paid for things that promoted independence. Knowing what a Medicaid waiver is will separate you from other advisors. Medicaid waivers are called something different in just about every state. In Ohio, they are called Medicaid waivers, and in most states, they have a close name to Medicaid waivers, but there might be a word or two added to the beginning or the end of that term. Understanding the history of Medicaid and what a Medicaid waiver is important to families with a loved one with a developmental disability,
Supplemental Security Income (SSI) for people with developmental disabilities
Supplemental Security Income is the first step into a means-tested program for most people who have a loved one with a developmental disability. Eligibility for this is impacted by various circumstances and needs when the individual is a minor.
Take my family, for example. I have three daughters; Megan, my daughter with Down syndrome, is in the eighth grade. Megan does not have Medicaid right now, nor does she have a Medicaid waiver, and she does not meet the criteria or need for having those programs right now. When she turns 18, though, she will meet the criteria for SSI. Most individuals get SSI when they turn 18. In most states, when you become eligible for SSI, you will automatically become eligible for Medicaid. Families can get SSI while the child is still a minor, but while the child is a minor, the parent’s income and assets count towards eligibility.
On Megan’s 18th birthday, she will still live in my house. I will still pay most of her expenses, but her income and assets will be evaluated regarding whether she qualifies for SSI. My assets and income will not impact her eligibility, and my wife’s assets and income will not impact her eligibility.
An eighteenth birthday should always be a red flag when you have a client with a child with a developmental disability because many things happen from a timeline standpoint with that 18th birthday: 1. That person needs to apply for SSI. 2. Neither the parent’s income nor assets matter. 3. The application process is very frustrating, so find a resource that can help families apply for SSI. You will not make that referral very often, but it will be much appreciated when you do. While families can do it on their own, it is very difficult. . It is not something anyone is ever going to get rich doing. But it is a great service you can provide to people in terms of helping them to become eligible for these programs.
The full monthly SSI benefit for 2022 is $841. If you are married, the maximum benefit for a married couple is $1,261. The payment will be reduced if the parent is providing in-kind support because SSI is intended to, at its core, pay for food, shelter, and clothing.
So if mom and dad continue to provide food, shelter, and clothing, then Social Security will reduce the amount of SSI they pay their child. The parents must understand that their ongoing free provision of food, shelter, and clothing will impact the SSI amount that their child will receive. There are lots of ways that you can maximize that amount. And there are many reasons, as a parent, why you are doing the right thing to charge a fee or an annual expense contribution to your loved one with a developmental disability to maximize the SSI amount.
Families ask if their loved one can work while on SSI. Employment is always good for a loved one with a developmental disability. There are some nuance situations where I tell families they are better off from a strict dollar and cents standpoint to not take a particular job. But employment will affect what their child receives from SSI. There are a couple of exclusions. The first $85 is excluded from income. There is also a much larger student-earned income exclusion. If you are a student under the age of 22, you can earn more income. SSI will be reduced by 50 cents for every dollar that you earn. For example, if you earn $285 every month, they will exclude the first $85, and then they will reduce your SSI benefit by $100 because you have $200 of income over and above the general exclusion.
Going back in my matrix, you see SSI, Medicaid, and Medicaid waivers are tied directly to the individual’s eligibility. SSI and Medicaid are entitlement programs, meaning you will get them if you are eligible for them. A Medicaid waiver is not an entitlement program; even if you are eligible, you might not get it. This is where you have to be an advocate and show need. Every state has slightly different criteria for assessing whom to give waivers.
Social Security Disability (SSD), or Title 2 benefit, is at the bottom of the matrix. Social Security replaces income when a worker retires, dies, or becomes disabled. SSD comes from the Social Security Trust Fund. Childhood disability benefits, also known as Disabled Adult Child benefits, are known by about 20 other acronyms.
For example, 20 years from now I will be 62 years old. Twenty years from now, Megan will be age 33. Say I decide to retire. My retirement at age 62 will impact Megan if I choose to draw Social Security. Most financial planners recommend waiting until the last possible moment to draw Social Security. However, the math is different when you have a child with a developmental disability. A top-of-the-triangle financial planner will recognize that for a client who starts drawing Social Security and has a child with Down syndrome, means the child should switch to Adult Disabled Child Benefits.
For example, say I retire at age 62 with my benefit at $2,258 a month. If I wait until full retirement age, I will collect $3,321 a month. That’s a big difference. If I wait until age 70, I could receive $4,163 a month. There are many reasons why I would be much better off waiting until age 70 to retire if I do not need the money.
But let’s factor Megan into this. If I retire at age 62, yes, I will only get $2,258 a month, but because I retired, Megan will get that Adult Disabled Child Benefit or Childhood Disability Benefit. Her benefit amount will be 50 percent of my retirement benefit at my full retirement age or 50 percent of the $3,321 a month. Keep in mind that the SSI goes away ($841/month), but she will now have a monthly benefit of $1660.50. Am I better off retiring at 62? No, but when I retire, this is absolutely information I need to factor in.
Two years after Megan is eligible for Adult Disabled Child Benefit or Disabled Adult Child Benefit, she will get Medicare. Megan may have started adulthood receiving SSI and Medicaid, so she might have Medicaid paying for health insurance and SSI as her income stream. She hopefully has a Medicaid waiver that has people coming into the home, helping her with transportation to work and job coaching, helping her with everything from laundry to meal planning.
When I retire, the SSI goes away, and she receives SSD, which in most situations, will be a much larger amount. Two years later, Medicare will become her primary health insurance. Anyone who has ever had Medicare knows Medicare is not free, and it can get expensive. In the Medicaid plan of most states, they have what is called a Medicare premium assistance program. If I am on Medicare and have a developmental disability, Medicare will be my primary health insurance, and Medicaid will be secondary. Medicaid will pay the cost associated with Medicare.
In sum, programs on the top part of the benefits matrix box are where eligibility is tied to the individual, and we want to protect that. Benefits at the top of the box are also means-tested, meaning we must protect the person’s eligibility. Benefits in the bottom half of the box (the adult disabled child SSD benefits) are not means-tested. Megan could still have Medicare, but if she has $100,000 in the bank, she will not be getting Medicaid.
Does your client have the right plan to protect eligibility? Why plan? If you fail to plan, you are planning to fail.
Every single person has an estate plan. They either have the estate plan that they have created for themselves, or they have the estate plan that the government has created for them. When you have a child with a developmental disability, the estate plan that the government has created for you does not work because it will render your child ineligible for some of the programs you spend your life advocating for your child to get. The last thing we want is for mom or dad’s death to mess up eligibility for a child’s benefit. That is why it is important to have the right plan.
Why have a trust for your developmentally disabled child?
A trust is a basket. When you sign a trust agreement, you sign a document that creates a basket. Either during your life or upon your death, we will make sure assets go into that basket in a way that does not go through what Ohio calls the probate process. States have different processes where the government oversees assets passing from generation to generation. We want to keep the government out of your estate plan to the greatest extent possible.
From a glance across the national landscape and having had trusts we have prepared here reviewed by attorneys in other states, certain nuances differ in every state. Having that trust reviewed by an attorney licensed in your state is important, and many laws carry over from state to state.
In estate planning, there is a difference between first-party and third-party money.
First-party money is that which legally belongs to a person with a developmental disability. With my family again as an example, money that legally belongs to Megan is first-party money. My money, my retirement account, my life insurance, my checking and savings, my house, and my car is third-party money to Megan because she does not legally own it. I am alive, and my wife is alive; we own that money. While you cannot completely disinherit a minor child, in large part, you can, and there is nothing that legally requires me to give that money to Megan upon my passing, with some exceptions. First-party and third-party money will be subject to different rules in most circumstances. We can protect third-party money in a way that we do not have in terms of protecting first-party money.
Let’s start by talking about third-party assets, or those assets that belong to mom, dad, or even a grandparent. We see this all the time. Grandma and Grandpa did their estate plan 20 years ago. They created a will that says that upon our death, each grandkid gets $10,000. In Ohio, that transfer of ownership takes place upon Grandma and Grandpa’s death, even though the grandchild might not get that money for several months, depending on the court process. At that point, the money goes from being third-party money to first-party money because their will says it goes to their grandkids.
Parents, grandparents, concerned friends, or family must act while the money is a third-party asset. Once it becomes a first-party asset, it is very difficult and rare to pull it back and protect it as though it were a third-party asset. We want to work within the third-party asset rules, not the first-party asset rules to the greatest extent we can.
This is why we use things like a third-party discretionary trust. A third-party discretionary trust is, in my opinion, the best planning tool for a family or a mom and dad who have a loved one with a developmental disability. Again, this is subject to nuances of state law. So in your state, you would want to talk to an estate planning attorney who has experience doing estate planning for persons with developmental disabilities, experience doing developmental disability law, and understands Medicaid and the implications.
My wife and I have created a basket with our third-party discretionary trust. On our death, the inheritance we want for Megan’s benefit will go right into that basket. Once it is in that basket, that money can grow and be used as needed. There are pretty broad rules on what it can be used for, so if she wants to go on vacation with her sisters, she can, and the trust can help pay for that. If she needs a little bit of help with certain expenses in life, the trust is there to pay for that. It is a safety net. As a parent, we want to build that safety net for our children to use when we are gone, which is what this basket provides.
Someday when Megan dies, whatever money is left in that third-party discretionary trust will be used to pay for her funeral, burial, and things of that nature. Once those expenses are paid, any money left will go to my other two daughters, my grandkids, or the charity I pick. But ultimately, I have decided – as the person making the trust – where the money will go; I can do that when it is third-party money, and I cannot do that when it is first-party money.
Many attorneys confuse a third-party trust with a special needs one. Attorneys will create a third-party discretionary trust and slap a special needs trust on top of it, and these are two very different things. A special needs trust is a first-party trust designed to hold money that is first-party assets such as inheritance, lawsuits, gifts, wages, or earnings.
If Megan were in a car accident and injured by a drunk driver, and we sued that drunk driver and won $50,000, we still want her to be eligible for Medicaid and SSI. This is when we would use a special needs trust. In Ohio, it can be created by the consumer, parent, grandparent, legal guardian, or the court. There are more rules for when and how that money can be used. But it will protect her eligibility for Medicaid and SSI.
One of the things I don’t like about a special needs trust is that it has a Medicaid payback requirement. On Megan’s passing, that money will not be used to pay for funeral and burial; that money will be used to pay back the State of Ohio for what the State of Ohio has paid on her behalf during her lifetime. Most times, you cannot repay anywhere near the total amount of the debt, so there is no recovery made over and above what the trust can pay, provided the person did not have any assets in their name. This is an important distinction. A third-party trust is a trust that will hold money that never legally belonged to the person with the developmental disability. The first-party special needs trust is designed specifically to hold money that belongs to the person with a developmental disability.
Here is another top-of-the-triangle reference for you. The Secure Act has been around for a couple of years now. If done correctly, a third-party discretionary trust can be an accumulation trust. That means the individual with the developmental disability can still receive a lifetime stretch or a lifetime payout of an inherited IRA.
Say you have three kids, a $300,000 home, $300,000 in savings, and a $300,000 IRA. Suppose the $300,000 IRA goes to the child with the developmental disability, and the other two kids split the other two assets. In that case, that child with a developmental disability is potentially going to be able to stretch the distributions from that retirement account. There are many moving parts with the Secure Act, so continue to pay attention and talk to professionals and keep your finger on the pulse in terms of that type of planning strategy, but in large part, stretching the distributions still does work.
Road mapping your estate plan
Road mapping is important. We spend much time with our clients road mapping. When you do an estate plan, a roadmap is critical. I’m not talking about who gets the toaster and the microwave, but who are your child’s doctors? What are you advocating with the school about? What is going to make a transition to life without the parent easier? This is all part of a road-mapping process.
ABLE Act accounts are a first-party asset and are relatively new. They are a savings account for persons with developmental disabilities. They can save money in an ABLE Act account in a way that does not count towards their asset limit for the various government benefits we discussed. They are a great tool, but you must understand how they work.
Different states have different ABLE Act account programs. The State of Ohio has the largest ABLE Act account program, STABLE. To use Ohio’s program, you do not have to be an Ohio resident. It is not ideal for estate planning because it is a first-party account. When the individual dies, the money left in an ABLE Act account will be used to pay back their state of residence for expenditures the state has spent on their behalf. A few states have taken steps to make it so that ABLE Act accounts are not subject to Medicaid payback, and I tip my hat to those states. Good for you for doing that, but by and large, most states’ ABLE Act accounts still require Medicaid payback at the time of death.
There are also strict limitations on how much money can be put into an ABLE Act account; only $16,000 a year can go into an ABLE Act account, so you have to be careful. That is another reason it does not work for inheritance if you want to leave a more meaningful sum of money.
What can ABLE Act accounts be used for? Any qualified disability expenses include basic living expenses, housing, and transportation. Many special needs trusts are first-party trusts with hard and fast rules that prohibit them from being used to pay for some of the things an ABLE Act account can pay for. A first-party special needs trust can make a distribution to an ABLE account. When dealing with the more restrictive rules of a first-party special needs trust, we run the distributions through an ABLE Act account to benefit from the wider variety of expenses it can be used to pay for.
The effects of bad planning
A big red flag is if the person is under guardianship or conservatorship. You must make sure you do the right type of planning to keep the money outside the scope of what your state court will have jurisdiction over when the mom or dad passes away. If the individual is on benefits, they are inheriting money, which creates a problem.
We do not want minors to inherit money in their name. We do not want people under guardianship inheriting money in their name. We do not want people on benefits like we have discussed today, inheriting money and then being kicked off these programs. Some common confusing situations, though specific to families with loved ones with developmental disabilities, are inheriting or buying a home. They can be done if structured correctly. Retirement accounts, too.
Bad trustees are always a problem. With this type of trust planning, it is critical to pick the right people to serve as trustee. If guardianship or conservatorship is in play, you might have to get the court involved in whatever it is you are doing if you do not do advanced planning. . You need somebody in your neck of the woods who provides these types of services for your clients.
- Traditional rules that pertain to when to apply for Social Security do not apply when there is a family member with a developmental disability. Because I have a child with a developmental disability, it doesn’t mean I’ll apply for Social Security at age 62. However, the impact on her will change the math for when and how I decide to apply. This is where the ball goes back into your court as a financial planner to help figure out how that math impacts the family.
- Understand the importance of government benefits and how easy it is to lose them with bad planning. You might become ineligible for a benefit in June, and the government may not catch wind of it until the following April. They will want to be paid back for every one of those months that you were ineligible for the benefits and receiving them.
- Special needs planning includes far more than just documents. I only briefly touched on it, but a roadmap and some of that process are just as, if not more important than, some of the trust planning we do. You have to have a map in place for what will happen when a loved one with a developmental disability’s family is no longer there to be the support they have been for the person’s entire life.
About Derek Graham, Partner, Resch, Root, Philipps & Graham, LLC
Derek Graham is an attorney and partner at Resch, Root, Philipps & Graham, LLC in Dublin, Ohio. Derek’s practice focuses on developmental disability law, special needs planning, guardianship and probate. Derek’s practice in developmental disability law started in 2009 when his oldest daughter was born with Down syndrome.
Derek knows first-hand how confusing and complicated it can be when trying to navigate all of the medical, legal, social and benefit-related issues that families face. Derek enjoys helping to simplify the process and teach families about the legal topics that really matter to individuals with developmental disabilities.
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